U.S. consumer companies a relative refuge in recent market turmoil

SAN FRANCISCO (Reuters) - Many of the stocks that have gotten off most lightly during the waves of selling on Wall Street this week are those standing to benefit from consumers with more buying power, like Amazon.com (AMZN.O) and Netflix (NFLX.O).

The S&P 500 consumer discretionary index’s 4 percent drop on Thursday was worse than the S&P 500’s 3.75 percent fall, but over the past week its decline has been less violent than slumps suffered by the broader market.

Consumer discretionary is down about 6 percent since a market rout began last Friday, compared to drops of more than 9 percent in financials, technology and telecoms. The S&P 500 is down 8.5 percent in the past week.

Worried that a nine-year bull market may be ending, but still confident that the U.S. economy is healthy, many investors are eyeing companies that stand to benefit from consumers with increasing amounts of spending money.

Phil Blancato, head of Ladenburg Thalmann Asset Management in New York, said he plans to invest more of his clients’ savings in consumer discretionary stocks - but only once the market settles from recent volatility.

“That euphoric sense that the consumer gets when they’re earning more money, when they have more discretionary money to spend, we’re at the beginning of that time period,” Blancato said.

The number of Americans filing for unemployment benefits fell last week to its lowest in nearly 45 years, according to a U.S. Labor Department report on Thursday that bolstered expectations of faster wage growth this year.

Such signs of a swelling economy, along with an expected further stimulus from a $1.5 trillion tax cut package passed by Congress in December, have contributed to inflation anxiety, a key reason for the market’s recent selloff. But higher wages and more jobs for U.S. workers are also positive for companies reliant on healthy consumers, and that is making investors more interested in consumer discretionary stocks.

In the past week, automobiles and auto components sellers have been among the less punished stocks on Wall Street. General Motors (GM.N) is down 4 percent during that time, and Harley-Davidson (HOG.N) has lost 2.3 percent. Consumer durables and retailers, including Mattel (MAT.O), Garmin (GRMN.O) and Nordstrom (JWN.N), have also fared better than the broader market.

Among the so-called FANG stocks, wildly popular with investors in recent years, Netflix has declined 5.6 percent over the past five sessions, while Amazon, by far the largest consumer discretionary stock, has limited its loss to 2.8 percent, helped by blockbuster quarterly results last week. Facebook (FB.O) and Google-owner Alphabet (GOOGL.O), which depend on advertisers for their revenue, have lost 11 percent and 15 percent respectively in the past five sessions.

Goldman Sachs included Netflix, Molson Coors Brewing (TAP.N) and Costco Wholesale (COST.O) in a basket of low-labor cost stocks most insulated from wage inflation and likely to outperform in an inflationary environment.

Materials stocks have also done a bit less badly than others, with the S&P 500 materials index down 7.5 percent in the past week.

“We think materials is the best hedge against a pickup in inflation,” said Jill Carey Hall, an equity and quantitative strategist at Bank of America Merrill Lynch in New York. “We looked at how is it correlated with each of the sectors back to the 1970s, and materials shows up at the top of the list as the most positively correlated with inflation.”

Investors reacting to recently rising yields on the 10-year Treasury US10YT=RR by buying defensive stocks like real estate and utilities may not be positioning themselves well to benefit more long term from the strength of the U.S. economy, some strategists warn.

“We will find a bottom here, whether it’s today or tomorrow, or next week, and then we will resume higher on the idea that the economy is doing well,” said Jason Ware, chief investment officer at Albion Financial Group in Salt Lake City, Utah.

Analysts on average expect consumer discretionary companies in the S&P 500 to increase their earnings by 15.8 percent in 2018, according to Thomson Reuters I/B/E/S. At the start of January, analysts had predicted those companies would grow their earnings 9.2 percent for the year.

Additional reporting by by Sinead Carew and Caroline Valetkevitch in New York; Editing by Alden Bentley and Chizu Nomiyama